By Chad Smith
Learn more about Chad on NerdWallet’s Ask an Advisor
During our first meeting, a 55-year-old couple asked, “How do you think we’re doing for people our age? Are we saving enough?” This is a good question, one I’m often asked. People want to know how they measure up.
To answer this question, however, you first need to be able to answer these questions:
- What are you saving for?
- What’s important to your quality of life?
- How much can you reasonably spend to attain that quality of life?
When people ask if they are saving enough, they hope to hear that they are doing better than most. In their minds, this means things are moving in the right direction. But “keeping up with the Joneses” has never been a bankable strategy. So we have dig deeper to determine what the question is really about.
For the couple I was meeting with, what they were really asking was whether it would be possible for them to retire early based on their current savings. But for a young couple just having kids, the same question is likely to center on saving for college or moving into a bigger house. People ultimately want to know if they will have enough money to do the things they still hope to do.
To begin answering this question for yourself, you first need to know the type of life you want to live. Spending decisions are heavily influenced by quality-of-life considerations. And it’s those considerations that determine whether you will be able to set a lot of money aside for the future, or whether most of your income is already committed to buying the lifestyle you want today. Some examples:
Hire it out, or do it yourself? Some people pay house cleaners and lawn services, while others prefer to handle these necessary but often unpleasant and time-consuming tasks themselves. That can be a difference of hundreds of dollars a month.
How do you like your food? Eating nice meals out frequently may be the spice of life for you, but others enjoy cooking at home. That makes a big difference in how much you can put into savings.
Is your home literally your castle? Decisions on the bigger-ticket items have the greatest impact. A large house will require a larger down payment, meaning less liquid savings.
Love that new-car smell? Some people aspire to drive nicer cars for short periods, while others want to drive cars until the wheels fall off. The difference in loan payments alone can be major, not to mention maintenance, insurance and so forth.
Is there family in your future? Then there’s that little decision about having kids, which will have more than a slight impact on your financial trajectory. For many, of course, raising children is a priceless part of life.
The point of asking these and other questions is this: Acknowledging the things you consider important to your quality of life can give you a great blueprint for the amount it will take to sustain that life.
Struggling to save
While some who ask “Am I saving enough?” are seeking validation, others are worried that they haven’t saved enough.
Recent research finds that 68% of people believe they’ve saved too little — but only 3% are actually following through by saving more. This isn’t surprising. It’s the same disconnect you find in all endeavors that require consistent action. We can all get charged up on a jolt of motivation, but when it’s time to implement, we freeze.
Thoughts bubble up about the big trips we want to take this summer, or that luxury car we’ve always wanted (and deserve). We start thinking about putting more money into our 401(k), and we realize we need to limit our current spending to make it work. Then it doesn’t sound like such a good idea.
This is when what seems simple in theory (saving more) becomes hard. Making choices that change our quality of life now is more painful than we originally thought and often results in inaction.
Planning is the key
The only way to know if you are saving enough is to piece together your financial puzzle.
Take inventory of what you’ve saved and how much you anticipate you can still save. Set up automatic transfers of money from checking to savings — but watch the credit card bills. Automating savings while accumulating credit card debt is counterproductive.
Working with a qualified advisor can make an enormous difference. Studies have shown the effect that good advice can produce. Often, this advice helps prevent you from ratcheting up your lifestyle too quickly in the first place.
Some questions have easy answers. Unfortunately, “Have I saved enough?” is not one of them. With successful financial planning, you can find your answer — and if it’s no, you can devise a way to get to yes.
A version of this article also appears on Nasdaq.
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